The Geography of Trading Ecosystem Services: A Case Study of Wetland and Stream Compensatory Mitigation Markets

By Philip Womble & Martin Doyle

With the exception of greenhouse gas trading programs, environmental markets are prisoners of their own geography — and with good reason. Climate change is a global phenomenon, and so carbon markets can be geographically all-inclusive — a ton of carbon dioxide emitted in Beijing has the same effect as a ton of carbon dioxide emitted in New York. Other environmental markets are more nuanced. Markets for water quality, biodiversity, endangered species, fisheries, air quality, and aquatic resources, to name a few, must recognize that the commodities they trade exist at particular geographic scales, and set appropriate spatial limits on the redistribution of environmental quality. The size of geographic trading areas has significant implications for the economic viability of markets and the ecological quality of their offsets.

U.S. wetland and stream mitigation markets, which emerged in the 1980s, provide perhaps the most established empirical example of how environmental markets function. This Article presents the first systematic assessment of the federal and state laws, regulations, guidance, and operating practices that shape the geographic size of U.S. wetland and stream markets. This Article first addresses the history of these geographic restrictions under the Clean Water Act, the importance of spatial context for ecosystem functions and services, and the economic-ecological tradeoffs implicated by geographic trading limits. Then, based on the results of the assessment, this Article argues that regulators should increase their transparency and consistency in setting geographic trading limits. It also presents a framework for using more specific geographic limits for different types of wetland and stream offsets to enhance a market’s ecological and economic stability. Lessons from setting geographic limits for wetland and stream markets can be applied to other, nascent environmental markets.